IMO2020 Switchover Dates and the Effect on Demand, Storage and Liquidity

by Paul Hardy, NSI
Tuesday March 13, 2018

One factor little spoken about is at what date will HSFO demand drop off. It is clear speaking with a number of our owners that they plan to switch to compliant fuel at varying periods prior to 1st of January 2020. This has a number of knock on effects for suppliers.

Firstly, if buying product under term contract the supplier should build in some degree of tolerance in volumes for the last quarter of 2019. The issue will be how much tolerance the cargo supplier will allow. It is important to avoid any claims for underlift and associated costs for underlying hedges from the cargo supplier.

If buying cargo from differing sources and you have term contracts on the supply side with various ship owners, will access to HSFO be ensured in Q4 2019? Again you may be faced with claims for undersupply from said owners due to lack of avails of cargo.

Both sides throw up difficult logistical challenges and need for future planning.

A major contributing factor will be storage and at what time is it optimal to clean tanks and replace HSFO with compliant product. Of course this will depend on the extent of your storage capacity and current utilisation. The risk is the timing is wrong and HSFO product is left in tanks. This is a real issue with only an estimated 2% of the world's fleet being able to burn HSFO post 1st January 2020. Product left in tank in some markets may well become 'distressed cargo' with potentially limited carriage possibilities to other markets.

The problem will be exacerbated in minor ports due to further reduced off-take opportunities. As well as the increased storage costs for HSFO there will be an opportunity cost as tanks will not be available for use for compliant product. As previously written, with demand falling the price of HSFO will weaken which creates a perfect storm of increased costs, falling sales prices and loss of market share on compliant fuel whilst trying to sell HSFO to free the tanks up.

There is also another financial consideration to take into account, that of liquidity for the supplier. A reduced off-take of products will mean slower turn around of cargo and longer financing periods. It is essential thus to plan now with banking partners to make them aware of the additional potential capital requirements. We all know in many ports the fast turnover of product is the key to profit and this may not be possible. Suppliers other option will be to source short term financing via a trading house at a comparably high cost. So my advice is plan now and save for the future.

The market is thus poised as a perfect place for a large trading house to make money offering volume and liquidity in return for reductions in price from the supplier.

So what as brokers can we do differently? Firstly we also have a steady off-take from many blue chip clients. Similarly as a trader we can package volume and pass on savings to our owners. The major difference is our broking fees which, are transparent and fixed. As we get closer to the switchover date we will be involved in significant dialogue with all of our supply partners to avoid such bottlenecks in supply and to aggregate the data regarding proposed switchover dates of products by our owners. 

We believe as brokers we can add a significant amount of value to the supply chain through the analysis of data and being the catalyst of collaboration between buyer and seller. We also have contacts within the financing community to help plan for suppliers additional capital requirements and we are happy to introduce our supply partners to banks/insurance companies  we are in regular contact with.

We are also starting to work with some owners and suppliers to assist with tank cleaning to enable tanks to switch straight from HSFO to LS products  with a lower risk of contamination of first cargo. Through consolidating demand for this service we are seeing preferential rates for cleaning services and would be happy to talk to any owners and suppliers who would like assistance in this area.

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